The more time I spend reviewing decisions in the complex litigation/class action arena, the more I am convinced that the lower Courts of California are, in many instances, at odds with the California Supreme Court. The most recent decision to suggest this schism is Cohen v. DIRECTV, Inc. (October 28, 2009) from the Court of Appeal (Second Appellate District, Division Eight). Cohen is the most recent California appellate court Opinion to comment on the treatment of UCL claims by In re Tobacco II Cases, 46 Cal.4th 298 (2009), the prior two decisions being Kaldenbach v. Mutual of Omaha Life Insurance Company, et al. (October 26, 2009) (discussed on this blog here) and Morgan, et al. v. AT&T Wireless Services, Inc. (September 23, 2009) (discussed on this blog here). Cohen affirmed a trial court's denial of class certification of CLRA and UCL claims, but its analysis runs head first into Tobacco II and other Supreme Court decisions. The UCL Practitioner has an extensive post analyzing Cohen against Tobacco II. I will comment on the Cohen holding, but I also want to offer some thoughts as to why this divergence between California's highest court and the other courts throughout the state might be happening.

Since some of my comments depend upon the subject matter of Cohen, I begin by providing some background about the claims in that matter. Cohen concerns an allegation that DIRECTV advertised that the channels in its HD Package were broadcast in the 1080i HD standard (an interlaced resolution of 1920x1080 pixels), at 19.4 Mbps, but later compressed each HD channel down to 6.6 Mbps. The 19.4 and 6.6 figures refer to the volume of data being transmitted each second, expressed as Megabits per second. So, expressed another way, the Cohen action complained that the quality of the video broadcast on HD channels was degraded by an increase in the amount of data compression. By way of background, the raw data rate for uncompressed HD video in the 1080i format can be well in excess of 100 Mbps, depending on frame rate and color information. This "raw" video is then compressed. In fact, it must be compressed - there is no practical system in place to deliver 100 Mbps to your television right now. The older mpeg-2 compression codec, or newer codecs, like H.264, compress the "raw" HD video into something smaller, using complex formulas that reduce the data used to transmit the images. The goal of compression is to obtain the best video-quality-to-size compromise. In the DIRECTV case, 19.4 Mbps is compressed video that would look very good, but "degradation" artifacts would still be visible on a good HD television (some "smearing" on fast action or a blocky, pixelated appearance in areas of solid color, blacks in particular). 6.6 Mbps is very compressed 1080i HD content; it is compressed to one third the size of the already compressed 19.4 Mbps feed. You would see more compression artifacts on a good/larger HD television.

There are a number of certification issues in Cohen. Ascertainability receives some significant discussion. But the portion that is likely of greatest interest is the discussion of reliance under the UCL; it is the area in which Cohen diverges from Tobacco II. Regarding reliance in UCL actions, the Trial Court in Cohen said: "Even pre-Prop. 64 cases only allow inferred reliance where the misrepresentations were common to all class members. An inference of classwide reliance cannot be made where there is no showing that representations were made uniformly to all members of the class." Slip op., at 7. The Cohen Court started its discussion about the UCL with this observation that presages the outcome:

Although the rules under the UCL may or may not be different following our Supreme Court's recent decision in In re Tobacco II Cases (2009) 46 Cal.4th 298 (Tobacco II), an issue which we address below, we do not understand the UCL to authorize an award for injunctive relief and/or restitution on behalf of a consumer who was never exposed in any way to an allegedly wrongful business practice.

Slip op., at 14. The Cohen Court then stated its view of the holding from Tobacco II in two separate ways. First, it offered a brief summary of the decision:

On review, the Supreme Court specifically addressed two questions: “First, who in a UCL class action must comply with Proposition 64's standing requirements, the class representatives or all unnamed class members, in order for the class action to proceed? . . . Second, what is the causation requirement for purposes of establishing standing under the UCL . . . ?” (Tobacco II, supra, 46 Cal.4th at p. 306, italics added.) This past spring, the Supreme Court answered these two questions by ruling (1) only the class representatives must meet Proposition 64's standing requirements of actual injury and causation; (2) only the class representatives must establish reliance in accordance with fraudulent inducement principles in order for the class action to proceed; and (3) the class representatives do not have to show reliance on particular advertisements or marketing materials with “unrealistic” specificity. (Tobacco II, supra, 46 Cal.4th at pp. 321-329.)

Slip op., at 15. Then, the Cohen Court offered its own summary of what it believes that the California Supreme Court actually meant:

Viewed from the other direction, Tobacco II held that, for purposes of standing in context of the class certification issue in a “false advertising” case involving the UCL, the class members need not be assessed for the element of reliance. Or, in other words, class certification may not be defeated on the ground of lack of standing upon a showing that class members did not rely on false advertising. In short, Tobacco II essentially ruled that, for purposes of standing, as long as a single plaintiff is able to establish that he or she relied on a defendant‟s false advertising, a multitude of class members will also have standing, regardless of whether any of those class members have in any way relied upon the defendant's allegedly improper conduct.

Slip op. at 15. Notice the interesting language used by the Cohen Court: "Tobacco IIessentially ruled...." One can say that the Supreme Court "did" or "did not" rule a certain way. But saying that it "essentially" ruled a certain way is problematic for everyone. This suggests an outcome that is implied by Tobacco II, but not stated. To sort that out, we have to compare Cohen to Tobacco II and determine what Tobacco II does and does not say.

Returning to Cohen, the Court was more direct when it stated its intention to disregard Tobacco II as offering a controlling decision for the case before it: "In the contextual setting presented by Cohen's present case, we find Tobacco II to be irrelevant because the issue of 'standing' simply is not the same thing as the issue of 'commonality.'" Slip op., at 15. The Court continued: "In short, the trial court's concerns that the UCL and the CLRA claims alleged by Cohen and the other class members would involve factual questions associated with their reliance on DIRECTV's alleged false representations was a proper criterion for the court's consideration when examining 'commonality' in the context of the subscribers'motion for class certification, even after Tobacco II." Slip op., at 16. Thus, the Cohen Court devised an analysis that permits circumvention of Tobacco II, holding that a trial court can't use classwide reliance issues for a "standing" challenge, but can use those same issues to bar certification. I posit that what we have here is most likely either a reverse engineered holding or a generally negative reaction to Tobacco II. The limited analysis of reliance issues as they pertain to the UCL was devised to support the desired outcome. The alternative is that the Cohen Court didn't examine Tobacco II carefully, and I find that less likely than the notion that the panel simply does not agree with the Tobacco II analysis or doesn't like the claims in the case.

I turn now to Tobacco II and argue that it directly addresses the contentions made in Cohen. In Tobacco II, the Supreme Court summarized the trial court's decision in that matter:

The trial court found that the “simple language” of Proposition 64 required that “for standing purposes, a showing of causation is required as to each class member's injury in fact.... [T]he injury in fact that each class member must show for standing purposes in this case would presumably consist of the cost of their cigarette purchases. But significant questions then arise undermining the purported commonality among the class members, such as whether each class member was exposed to Defendants' alleged false statements and whether each member purchased cigarettes ‘as a result’ of the false statements. Clearly ... individual issues predominate, making class treatment unmanageable and inefficient.”

Tobacco II, 46 Cal. 4th at 310-311. One can almost excuse the Cohen Court's narrow construction of Tobacco II as a "standing" decision. After all, the paragraph above does talk quite a bit about standing. But this overlooks the fact that causation is entangled with standing, and, for the named plaintiff, showing reliance is the method by which that plaintiff shows standing under a UCL claim asserting a "fraudulent" prong (likely to deceive) standard. What Cohen ignores is the fact that, according to Tobacco II, the causation showing (in this instance, a reliance showing) is not an element of a UCL claim, except that, after Proposition 64, the named plaintiff must make that showing. In fact, the next page of Tobacco II removes any doubt that pre-Proposition 64 decisions construing the UCL remain viable: "'[T]o state a claim under either the UCL or the false advertising law, based on false advertising or promotional practices, "it is necessary only to show that 'members of the public are likely to be "deceived." ' " ' (Kasky v. Nike, Inc. (2002) 27 Cal.4th 939, 951, 119 Cal.Rptr.2d 296, 45 P.3d 243.)" Tobacco II, 46 Cal. 4th at 312.

Continuing, the Supreme Court said:

The fraudulent business practice prong of the UCL has been understood to be distinct from common law fraud. “A [common law] fraudulent deception must be actually false, known to be false by the perpetrator and reasonably relied upon by a victim who incurs damages. None of these elements are required to state a claim for injunctive relief” under the UCL. ( Day v. AT & T Corp.(1998) 63 Cal.App.4th 325, 332, 74 Cal.Rptr.2d 55; see State Farm Fire & Casualty Co. v. Superior Court (1996) 45 Cal.App.4th 1093, 1105, 53 Cal.Rptr.2d 229.) This distinction reflects the UCL's focus on the defendant's conduct, rather than the plaintiff's damages, in service of the statute's larger purpose of protecting the general public against unscrupulous business practices. (Fletcher v. Security Pacific National Bank (1979) 23 Cal.3d 442, 453, 153 Cal.Rptr. 28, 591 P.2d 51.)

Tobacco II, 46 Cal.4th at 312. This discussion is at odds with Cohen's treatment of Tobacco II. Tobacco II said that "the UCL class action is a procedural device that enforces substantive law by aggregating many individual claims into a single claim, in compliance with Code of Civil Procedure section 382, to achieve the remedial goals outlined above. It does not change that substantive law, however." Tobacco II, 46 Cal.4th at 313. And Tobacco II unambiguously holds (i.e., not "essentially" holds) that:

[T]he language of section 17203 with respect to those entitled to restitution-“to restore to any person in interest any money or property, real or personal, which may have been acquired ” (italics added) by means of the unfair practice-is patently less stringent than the standing requirement for the class representative-“any person who has suffered injury in fact and has lost money or property as a result of the unfair competition.” (§ 17204, italics added.) This language, construed in light of the “concern that wrongdoers not retain the benefits of their misconduct” (Fletcher v. Security Pacific National Bank, supra, 23 Cal.3d 442, 452, 153 Cal.Rptr. 28, 591 P.2d 51) has led courts repeatedly and consistently to hold that relief under the UCL is available without individualized proof of deception, reliance and injury. (E.g., Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1267, 10 Cal.Rptr.2d 538, 833 P.2d 545; Committee on Children's Television, Inc. v. General Foods Corp., supra, 35 Cal.3d at p. 211, 197 Cal.Rptr. 783, 673 P.2d 660.) Accordingly, to hold that the absent class members on whose behalf a private UCL action is prosecuted must show on an individualized basis that they have “lost money or property as a result of the unfair competition” (§ 17204) would conflict with the language in section 17203 authorizing broader relief-the “may have been acquired” language-and implicitly overrule a fundamental holding in our previous decisions, including Fletcher, Bank of the West and Committee on Children's Television.

Tobacco II, 46 Cal.4th at 320. If "reliance" is not an element of a UCL claim, why is there still the perception that reliance has a role to play in UCL actions (outside of named plaintiff standing)? The Tobacco II decision may have supplied that answer as well:

Our conclusion with respect to the remedies set forth in section 17203 has nothing to do with the nonrestitutionary disgorgement disallowed in Kraus v. Trinity Management Services, Inc., supra, 23 Cal.4th 116, 96 Cal.Rptr.2d 485, 999 P.2d 718. In Kraus, we concluded that section 17203 does not allow a court to order disgorgement into a fluid recovery fund, e.g., to “compel a defendant to surrender all money obtained through an unfair practice even though not all is to be restored to the persons from whom it was obtained or those claiming under those persons.” (Id. at p. 127, 96 Cal.Rptr.2d 485, 999 P.2d 718.) This prohibition against nonrestitutionary disgorgement did not overrule any part of Fletcher v. Security Pacific National Bank, supra, 23 Cal.3d 442, 153 Cal.Rptr. 28, 591 P.2d 51, under which restitution may be ordered “without individualized proof of deception, reliance, and injury if necessary to prevent the use or employment of an unfair practice.” (Bank of the West, supra, 2 Cal.4th at p. 1267, 10 Cal.Rptr.2d 538, 833 P.2d 545.)

Tobacco II, 46 Cal.4th at 320, n. 14. This suggests that, in some circumstances, the quantum of a restitution order might ultimately depend upon a showing of injury by class members. Since reliance on an unfair practice can act as a surrogate of sorts for injury (under the the right facts and right species of UCL claim), this may explain why the belief persists that reliance is an unstated element of a UCL claim. It's either that, or a petulant refusal to understand that the UCL's fraudulent prong has nothing to do with common law fraud.

Tobacco II has already been circumvented by two of three California Courts of Appeal to apply it. The important question is why? Options include, at least, a desire not to reverse a trial court, a dislike of the holding of Tobacco II, a dislike of the theory of the case, or a general resistance to class actions (or some amalgam of those options).

The first option exists as an element of all appeals. Courts of Appeal begin their analysis with a presumption that the trial court will be affirmed. I cannot conclude that this is the primary factor in the Cohen Court's dismissive analysis.

The second option is certainly possible. The Cohen Court sounded almost disdainful of Tobacco II when it said, "In the contextual setting presented by Cohen's present case, we find Tobacco II to be irrelevant...." Slip op., at 15. I find this option to be a plausible explanation.

The third option is also possible. I do not find it a stretch to imagine the initial judicial reaction being something akin to, "Megawho per second? You're kidding, right?" When that happens, I think it is human nature to look for reasons not to facilitate the case or claim. If my comments offend any judicial sensibilities, I apologize for that. But we must recognize every participant in the judicial system -- clerk, judge, lawyer -- are human beings, with all of our prejudices and predispositions. I also find this option to be a plausible explanation.

The fourth option is also possible. When the various Districts and Divisions are examined over time, I have little doubt that some find panels find great utility in the class action device, while others find them abusive. Again, this has more to do with the predisposition of the observer than anything else, as it is as easy to find a class action of great social utility as it is to find one of questionable or zero worth. It's also worth noting that the second of my proposed options can be a subset of this fourth option. In other words, discomfiture about the Tobacco II opinion can be motivated either by that particular opinion or by an overall judicial fatigue regarding class actions generally.

I do not want to suggest that I know which of my theories, if any, explains Cohen. I suspect that some combination of class action fatigue and specific resistance to the claims in this particular case are at work here, but that is speculative on my part. However, I am certain that a growing rift exists between the Supreme Court's view of major legal questions and the views held by trial and intermediate appellate courts. As I am doubtful that anything can be done about this issue other than to raise awareness and hope for the best from our courts, I do not believe it is an issue that will resolve itself any time soon.

It is my intention to write more about the nature of this judicial divide here or elsewhere.

Before discussing the opinion, a definition is in order. “Generally speaking, so called ‘[v]anishing premium policies are paid dividends which in some instances can be sufficient to cause the premium to “offset” whereby dividend values are used to pay the premium. In such an instance, the cash premium “vanishes” and is no longer due from the insured.’” Keyes v. Guardian Life Ins. Co. of America, 194 F.R.D. 253, 254, n. 1 (S.D. Miss. 2000), quoting Phillips v. New England Mut. Life Ins. Co., 36 F.Supp.2d 345, 347 (S.D. Miss. 1998).) In other words, the theory is that a larger sum is paid into a policy for a few years, and then the investment of those funds should generate a dividend that is sufficient to pay the premium thereafter.

Returning to the opinion, the Court of Appeal spent significant time discussing the facts of the case and the nature of "vanishing premium" policies before summarizing the Trial Court's Order denying class certifiation:

The trial court denied the motion for class certification. It concluded Kaldenbach had not demonstrated numerosity other than his assertion that over 4,000 policies were sold. Kaldenbach had not shown ascertainability as there was no evidence as to how it could be shown which of the policyholders had received illustrations during the sales presentation.

The court concluded Kaldenbach had not shown typicality because Meyerson testified in his deposition that the sale to Kaldenbach was not typical as he had a clearly defined dominant need, Kaldenbach testified he never received any explanation from Meyerson about how the policy worked, how interest rates or costs of insurance were determined, what the extent of his obligation to pay annual premiums was, and what might happen if he stopped paying premiums. By contrast, Meyerson testified he fully explained the policy to Kaldenbach. “If [Kaldenbach] and Meyerson cannot even agree as to what was stated during the [sales] presentation to [Kaldenbach], how can [Kaldenbach's] claim be typical [and] be used to prove 4,000 claims? . . . It will take . . . individual evaluation of each claim to determine liability.”

The court also found Kaldenbach had not established commonality. Kaldenbach primarily relied upon uniformity in Mutual‟s sales materials, training, and illustrations, but there was no evidence linking those common tools to what was actually said or demonstrated in any individual sales transaction. The training materials and methods were not uniform throughout the class period. None of the allegedly scripted or memorized sales materials covered the alleged misrepresentations. And there was no evidence that uniform training or sales materials were used with each putative class member. There was no evidence all independent agents were required to take the offered training, took the offered training, had the same training, or used the same training or materials in their sales presentations. In fact “[t]here was evidence that the agents were free to ignore the training and written manuals.” Mutual‟s agents were independent contractors over whom Mutual had little or no control. Meyerson testified he did not follow his training or manuals in making the presentation to Kaldenbach. Kaldenbach had argued commonality could be found based solely on the use of illustrations, but Kaldenbach testified he never looked at the entire illustration, he only looked at the part of the illustration that showed the premium could vanish in four years because that was what Kaldenbach wanted.

The court also believed varying applicability of the statute of limitations and the delayed discovery rule to each putative class member‟s claim precluded class certification. The court noted the 70 percent lapse rate Kaldenbach alleged occurred with the policy at issue did not establish class-wide liability. There was no evidence it was an unusual lapse rate and no evidence as to why the policies had lapsed. For example, individual policyholders may have taken loans out against the cash accumulation, they may have decided to purchase a different product, or no longer needed the coverage. “[A]nalysis of why a policy lapsed is just one more issue that would need to be addressed on an individual and not class wide basis.”

Finally, the court listed the individualized issues that predominated and which could not be proven on a class-wide basis including: (1) did the agent take Mutual‟s training and read Mutual‟s manuals; (2) did the agent always use the training and materials; (3) what materials, disclosures, representations, and explanations were given to any given purchaser; (4) was an illustration used; (5) what information was input into the illustration; (6) did the purchaser rely on representations made in the sales presentation; (7) what were the customer‟s individual needs; (8) when did each class member‟s cause of action accrue; and (9) did the individual class member‟s policy lapse, and if so, why?

Slip op., at 11-13. After describing the valuable benefits of class actions, and noting that the reasoning of the Trial Court is scrutinized when reviewing an order denying certification, the Court of Appeal observed: "We may not reverse, however, simply because some of the court's reasoning was faulty, so long as any of the stated reasons are sufficient to justify the order. (Caro v. Procter & Gamble Co. (1993) 18 Cal.App.4th 644, 655-656 (Caro).)" Slip op., at 14-15.

As the Court of Appeal turned to the merits, it began its discussion by cataloging a number of federal court decisions where class certification was denied on the same theory. Parenthetically, the placement of this discussion suggests that the conclusions of those federal cases persuaded the Court of Appeal to affirm the Trial Court.

Eventually, the Court of Appeal turned to the promised discussion of In re Tobacco II Cases as it analyzed the denial of class certification for the UCL Cause of Action. The language selected by the Court of Appeal for italicization clearly suggests the outcome:

A private person “may pursue representative claims or relief on behalf of others only if the claimant meets the standing requirements . . . and complies with [s]ection 382 of the Code of Civil Procedure.” (Bus. & Prof. Code, § 17203.) Recently, in In re Tobacco II Cases (2009) 46 Cal.4th 298, 3245, the Supreme Court held in the UCL class action context, the “injury in fact” standing requirement imposed by Proposition 64 applies only to the class representative and not to “absent class members in a UCL class action where class requirements have otherwise been found to exist.” (Italics added.) UCL relief is available on a class basis “without individualized proof of deception, reliance and injury. [Citations.]” (Id. at p. 320.)

Slip op., at 20. The Plaintiff argued that the Trial Court incorrectly "premised its order denying class certification on the complexities of establishing each absent class members' reliance on the representations made and their injury." Slip op., at 20. The Court of Appeal wasn't concerned with this error:

There were myriad other individualized issues the court found to predominate including whether any given agent took Mutual's training, read its manuals, and routinely followed the training and materials; and what materials, disclosures, representations, and explanations were given to any given purchaser. These individualized issues go not to the injury suffered by a purchaser, but to whether there was in fact an unfair business practice by Mutual. Neither In re Tobacco II Cases, supra, 46 Cal.4th 298, nor Massachusetts Mutual, supra, 97 Cal.App.4th 1282, compel a different result.

Slip op., at 21. The Court of Appeal went on to distinguish Kaldenbach's case from In re Tobacco II Cases and Massachusetts Mutual:

[B]oth In re Tobacco II Cases and Massachusetts Mutual involved identical misrepresentations and/or nondisclosures by the defendants made to the entire class. In re Tobacco II Cases targeted the tobacco industries' deceptive advertisements and statements disseminated to the public about the health effects of tobacco use. Massachusetts Mutual concerned the insurer's failure to disclose to policy purchasers and its agents its plan to decrease its discretionary dividend. In other words, there was no issue about defendants' uniform business practices giving rise to the UCL claim.

But here there is no such uniformity. Although Kaldenbach claimed Mutual's presentations relating to ALPs were uniform, it utilized standardized training methods, materials, and scripts to which agents were required to adhere, the evidence showed the opposite. Mutual's policies were sold by independent agents, and during the class period, they were not required to attend training or utilize any given sales materials. Agents were not required to adhere to a scripted sales presentation. Indeed Meyerson, who sold Kaldenbach his policy, testified at his deposition he did not use a scripted sales presentation or any training materials in making the sale to Kaldenbach.

Slip op., at 22. If nothing else, analyses like this will encourage sales policies that state vague guidelines and some variation in sales approaches to eliminate uniformity of representations to consumers. In any event, Kaldenbach's argument that he was entitled to an "inference of injury" for his fraud claim met with a similar fate, as the Court of Appeal noted that the inference is only available where the misrepresentations are uniform.

The Court of Appeal ignored the balance of the Trial Court's Order, concluding that the predominance of individualized issues was a sufficient ground for denying class certification. A complicated set of facts coupled with a seemingly conservative Court of Appeal made this outcome all but a formality.

In Kullar v. Foot Locker Retail, Inc., 168 Cal. App. 4th 116 (2008), the Court of Appeal (First Appellate District, Division Three) set aside a settlement and permitted an objector to obtain discovery to assess whether the settlement was "fair, reasonable and adequate." See blog post. However, the objector in Cho v. Seagate Technology Holdings, Inc. (Klausner, Objector) (September 15, 2009) did not achieve similar results, despite appealing to the very same First Appellate District, Divsion Three.

Cho alleged that Seagate overstated the size of its hard drives (its an ego thing, really) by using the decimal definition of “gigabyte” (equal to 1 billion bytes) which differed from the binary definition (equal to approximately 1.073 billion bytes) that was used by computer operating systems. Slip op., at 2. Eventually the matter settled, on the following terms:

For disc drives purchased before January 1, 2006, class members could choose either a cash payment equal to 5 percent of the net purchase price, or the Seagate Software Suite (the Software) that would allow users to perform enhanced computer and disc management functions. The estimated average cash benefit payable per hard drive was $7, and the Software had an estimated retail value of approximately $40. For disc drives purchased after January 1, 2006, when the packaging included more precise disclosures added by Seagate, class members were entitled to receive the Software.

Slip op., at 3. One objection was filed. The objector contended that "the notices of settlement were insufficient and inconsistent with the agreement. He claimed it was not possible to determine 'whether someone who purchased a Seagate Hard Drive (‘Drive’) from a retailer that is not a Seagate authorized retailer, but that retailer purchased the Drive from an authorized distributor, is a class member under thesettlement agreement.'" Slip op., at 4. In response to the objection, Cho and Seagate agreed that "'the words "authorized retailer or distributor" in the settlement agreement--which are not defined terms--are meant to include drives purchased either directly or indirectly from the Authorized Retailers orAuthorized Distributors listed on the website, meaning that they include retailers who are not themselves listed on the website, but who purchased from one of the entities that are listed on the website. The only excluded resellers are those whose drive sales are of fake, grey market, used, or stolen drives.'" Slip op. at 4-5. The tiral court did not find the objector's concerns persuasive:

The trial court overruled Klausner’s objections. The order approving settlement states: “Mr. Klausner’s objection to the term authorized retailers or distributors, the limitation of claims to purchases from authorized retailers or distributors, and his related claims that the class is impermissibly narrowed, that plaintiff’s counsel have not adequately represented the class and the plaintiff is an inadequate class representative are overruled. The court finds that it is appropriate to limit the class to purchasers from authorized retailers or distributors. . . . The Court received no information that any class member, other than Mr. Klausner, was confused by the term authorized retailer or distributor. In that regard, neither the Agreement nor the form of notice caused any prejudice to the Plaintiff Settlement Class.” Klausner was granted leave to file his additional objections, which were overruled, but his request to undertake discovery was denied.

Slip op., at 6. After discussing the current authority governing the review of class action settlements, the Court of Appeal concluded that mere inferences of collusion, with nothing more than accusations to support them, would not be considered:

There is no evidence that the parties to the settlement were intentionally deceptive or that they tried to mislead the court in seeking approval. We will not indulge Klausner’s suggestion that approval be reversed on the basis of misconduct by counsel.

Slip op., at 10. On the other hand, the Court of Appeal was concerned about ambiguity in the Notice to the class:

A class definition that is ambiguous presents a problem of class ascertainability that “ ‘goes to the heart of the question of class certification, which requires a class definition that is “precise, objective and presently ascertainable.” ’ ” (Global Minerals & Metals Corp. v. Superior Court (2003) 113 Cal.App.4th 836, 858.) In the absence of an ascertainable class, “ ‘it is not possible to give adequate notice to class members or to determine after the litigation has concluded who is barred from relitigating.’ ” (Ibid.) The goal in defining the class is to use terminology that will convey sufficient meaning to enable persons hearing it to determine whether they are members of the class plaintiff wishes to represent.

Slip op., at 12. Applied to the facts of the case before it, the Court of Appeal said:

We have no disagreement with the parties’ objective and no quarrel with the trial court’s finding that exclusion of “those who purchased outside of Seagate’s authorized retail channels” is “rationally based on legitimate considerations.” The problem is that a fair reading of the class definition and the notice has the potential to lead some of those who purchased within Seagate’s authorized retail channels to conclude they are not members of the class.

Slip op., at 13. The Court of Appeal then clarified that the defect in the Notice was not fatal to the settlement and vacated the trial court's Order approving the settlement so that a revised Notice could issue to the class.

The final issue, Klausner's request for discovery, was quickly rejected by the Court of Appeal. The Court noted that objectors are not entitled to discovery unless some evidence of collusion existed. Because Klausner presented no evidence to the trial court, the Court of Appeal affirmed the trial court's decision to deny discovery rights to the objector.

I don't follow the Seventh Circuit's decisions closely. It's a bit outside my regular commute. But it has served up an educational opinion about class member standing that is too intriguing to pass up without comment.

Kohen v. Pacific Investment Management Co.(7th Cir. Jul. 7, 2009) follows from a successful Rule 23(f) petition by defendants for permission to appeal a District Court's order certifying a class. The suit, based on section 22(a) of the Commodity Exchange Act, 7 U.S.C. § 25(a), accuses the defendants (referred to in the appeal as “PIMCO”) of having violated section 9(a) of the Act, 7 U.S.C. § 13(a), by cornering a futures market. What's a cornered futures market? Glad you asked. Circuit Judge Posner explains in a very educational discussion that breaks down how a short seller can monopolize a futures market:

Changes in the demand for or the supply of the underlying commodity will make the price of a futures contract change over the period in which the contract is in force. If the price rises, the “long” (the buyer) benefits, as in our example, and if it falls the “short” (the seller) benefits. But a buyer may be able to force up the price by “cornering” the market—in this case by buying so many June contracts for 10-year Treasury notes that sellers can fulfill their contractual obligations only by dealing with that buyer.

Slip op. at 4. But defendants were trying to corner financial commodities, and you can't corner the money supply...except in one particular instance involving Treasury notes:

Board of Trade v. SEC, supra, 187 F.3d at 725, remarks thatsince the possibility of manipulation “comes from the potential imbalance between the deliverable supply and investors’ contract rights near the expiration date[,] . . . [f]inancial futures contracts, which are settled in cash, have no ‘deliverable supply’; there can never be a mismatch between demand and supply near the expiration, or at any other time.” But while it is correct that most financial futures contracts are settled in cash, CFTC v. Zelener, 373 F.3d 861, 865 (7th Cir. 2004); Kolb, supra, at 16, and that if a cash option exists there is no market to corner (no one can corner the U.S. money supply!), futures contracts traded on the Chicago Board of Trade for ten-year U.S. Treasury notes are an exception; they are not “cash settled.” Short sellers who make delivery must do so with approved U.S. Treasury notes; otherwise they must execute offsetting futures contracts.

Slip op. at 5. The class certified by the district court consisted of all persons who between May 9 and June 30, 2005, bought a June Contract in order to close out a short position. PIMCO challenged the definition on the ground that it includes persons who lack “standing” to sue because they did not lose money in their speculation on the June Contract. For example, some of the class members might have taken both short and long positions (in order to hedge—that is, to limit their potential losses) and made more money in the long positions by virtue of PIMCO’s alleged cornering of the market than they lost in their short positions. The plaintiffs acknowledged this possibility but argued that its significance was best determined at the damages stage of the litigation. The Court rejected PIMCO's contention:

PIMCO argues that before certifying a class the district judge was required to determine which class members had suffered damages. But putting the cart before the horse in that way would vitiate the economies of class action procedure; in effect the trial would precede the certification. It is true that injury is a prerequisite to standing. But as long as one member of a certified class has a plausible claim to have suffered damages, the requirement of standing is satisfied. United States ParoleCommission v. Geraghty, 445 U.S. 388, 404 (1980); Wiesmueller v. Kosobucki, 513 F.3d 784, 785-86 (7th Cir. 2008). This is true even if the named plaintiff (the class representative) lacks standing, provided that he can be replaced by a class member who has standing. “The named plaintiff who no longer has a stake may not be a suitable class representative, but that is not a matter of jurisdiction and would not disqualify him from continuing as class representative until a more suitable member of the class was found to replace him.” Id. at 786.

Slip op. at 7. Thus far, the Court has stated little more than settled principles about the ability to substitute class representatives after certification. But the Court also commented on pre-certification standing:

Before a class is certified, it is true, the named plaintiff must have standing, because at that stage no one else has a legally protected interest in maintaining the suit. Id.; Sosna v. Iowa, 419 U.S. 393, 402 (1975); Walters v. Edgar, 163 F.3d 430, 432-33 (7th Cir. 1998); Murray v. Auslander, 244 F.3d 807, 810 (11th Cir. 2001). And while ordinarily an unchallenged allegation of standing suffices, a colorable challenge requires the plaintiff to meet it rather than stand mute. Lujan v. Defenders of Wildlife, 504 U.S. 555, 561 (1992). PIMCO tried to show in the district court that two of the named plaintiffs could not have been injured by the alleged corner. We need not decide whether it succeeded in doing so, because even if it did, that left one named plaintiff with standing, and one is all that is necessary.

Slip op. at 7-8. The Court then explained that it is unnecessary to know whether all class members have standing to bring claims prior to certification:

What is true is that a class will often include persons who have not been injured by the defendant’s conduct; indeed this is almost inevitable because at the outset of the case many of the members of the class may be unknown, or if they are known still the facts bearing on their claims may be unknown. Such a possibility or indeed inevitability does not preclude class certification, Carnegie v. Household Int’l, supra, 376 F.3d at 661; 1 Alba Conte & Herbert Newberg, Newberg on Class Actions § 2:4, pp. 73-75 (4th ed. 2002), despite statements in some cases that it must be reasonably clear at the outset that all class members were injured by the defendant’s conduct. Adashunas v. Negley, 626 F.2d 600, 604 (7th Cir. 1980); Denney v. Deutsche Bank AG, 443 F.3d 253, 264 (2d Cir. 2006). Those cases focus on the class definition; if the definition is so broad that it sweeps within it persons who could not have been injured by the defendant’s conduct, it is too broad.

Slip op. at 9-10. Later, California authority received a nod from the Court:

At argument PIMCO’s lawyer told us that he could obtain names of class members. If so, he can, as in Bell v. Farmers Ins. Exchage, 9 Cal. Rptr. 3d 544, 550-51, 568, 571 (Cal. App. 2004), and Long v. Trans World Airlines, Inc., 1988 WL 87051, at *1 (N.D. Ill. Aug. 18, 1988), depose a random sample of class members to determine how many were net gainers from the alleged manipulation and therefore were not injured, and if it turns out to be a high percentage he could urge the district court to revisit its decision to certify the class. Cf. Hilao v. Estate of Marcos, 103 F.3d 767, 782-84 (9th Cir. 1996); Long v. Trans World Airlines, Inc., 761 F. Supp. 1320, 1325-30 (N.D. Ill. 1991); Marisol A. v. Giuliani, 1997 WL 630183, at *1 (S.D.N.Y. Oct. 10, 1997). PIMCO has not done this; should it take the hint and try to do so now, this will be an issue for consideration by the district judge.

Slip op. at 13. The Opinion finishes with a sharp kick to the shins: "PIMCO’s attempt to derail this suit at the outset is ill timed, ill conceived, and must fail. The district court’s class certification is AFFIRMED." Slip op. at 15. Nothing like an educational and blunt opinion to keep legal discourse interesting.

My thanks to Kimberly Kralowec for the mention at UCL Practitioner. And thanks to some guy whose name sounds like "I am - saw the end" for directing me to the case.

Continuing a theme, The Complex Litigator has noted on several occasions, including this recent post, that luck of the draw seems to have resulted in a substantial number of class action-related decision issuing from the Second Appellate District, Division Seven. You can add another decision published today to that already substantial list of significant decisions.

In Ghazaryan v. Diva Limousine, Ltd. (January 12, 2009), the Court of Appeal reversed a trial court’s order denying plaintiff’s motion for class certification and directed the trial court to enter an order certifying the proposed subclasses:

“Sarkis Ghazaryan appeals from the trial court’s order denying his motion to certify a class of limousine drivers allegedly undercompensated by Diva Limousine, Ltd. (Diva) in violation of California wage and hour laws. Ghazaryan’s lawsuit contests Diva’s policy of paying its drivers an hourly rate for assigned trips but failing to pay for on-call time between assignments (referred to by Diva employees as “gap time”). Because the trial court incorrectly focused on the potential difficulty of assessing the validity of Diva’s compensation policy in light of variations in how drivers spend their gap time, we reverse the court’s denial of the motion and remand with directions to certify Ghazaryan’s two proposed subclasses.

(Slip op., at p. 2.) The opinion is something of a guidebook on several major areas of contention in certification motions, focusing on the way that a trial court should evaluate evidence and decide certification motions.

First, the opinion reinforces and explains the operation of the rule that precludes evaluation of the merits to determine whether certification is appropriate: “Rather than denying certification because it cannot reach the merits, as the court did here, the trial court must evaluate whether the theory of recovery advanced by the plaintiff is likely to prove amenable to class treatment . . . .” (Slip op., at 6.)

Second, the opinion demonstrates application of the rule that a class definition that describes objective characteristics or experiences is sufficient at the certification stage: “As this court explained in Hicks v. Kaufman & Broad Home Corp. (2001) 89 Cal.App.4th 908, a class is properly defined in terms of ‘objective characteristics and common transactional facts,’ not by identifying the ultimate facts that will establish liability.” (Slip op., at 6.) Misunderstandings frequently arise when trial courts attempt to apply the rule that “merits-based” definitions should not be included in a class definition.

Third, the opinion explains the limitations on the “overbreadth” challenge to proposed class definitions, demonstrating application of the “overbreadth” limitation incorporated in the “ascertainability” requisite by comparing application of that requisite in Akkerman v. Mecta Corp., Inc. (2007) 152 Cal.App.4th 1094 with the application in Aguiar v. Cintas Corp. No. 2 (2006) 144 Cal.App.4th 121 and Bell v. Farmers Ins. Exchange (2004) 115 Cal.App.4th 715. (Slip op., at 8-9.) The fact that the Court identified outcomes at each end of the “ascertainability” spectrum adds at least some measure of clarity to what is observably a challenging issue.

The opinion also restates the fundamental purpose of the “ascertainability” requisite. The opinion notes that the ascertainability requirement is to ensure notice to potential class members who experienced the injury alleged in the action: “Because the purpose of the ascertainability requirement is to ensure notice to potential class members who at some time during their employment by Diva accumulated gap time, the proposed subclass consisting of all Diva drivers would simply and effectively accomplish this purpose.” (Slip op., at 9.)

Fourth, the opinion provides guidance on the community of interest requisite, and, specifically, the difficult standard for determining the predominance of common issues of law or fact. Because this standard is often fact-driven, the opinion is helpful in that it offers an instructive framework explaining by example the difference between the predominance of individualized issues and the mere existence of individual issues: “The distinction is illustrated by Silva v. Block (1996) 49 Cal.App.4th 345 (Silva) and Prince v. CLS Transportation, Inc., supra, 118 Cal.App.4th 1320.” (Slip op., at 9-13.) It is routinely the case that class certification is denied because some individual issues are identified by the trial court, despite the fact that any reasonable assessment of the facts and law supports a finding that common issues of law or fact predominate.

The opinion also touches on a still-evolving area of employment law: the “on-call” wage claim. The published caselaw on the compensability of “on-call” time under California law is almost nonexistent. Although the opinion does not establish a standard, it offers three important observations. First, the opinion recognizes that the Department of Labor Standards Enforcement (“DLSE”) has issued advisory letters on the subject. While the opinion is clear that the DLSE letters are not controlling authority, the opinion correctly notes that they should be given significant weight. Second, the opinion notes that “control” is the common element to all “on-call” factors in the DLSE’s analyses. And third, the opinion notes that the DLSE chose not to defer entirely to the corresponding federal standard under the Fair Labor Standards Act of 1938 or the important Ninth Circuit decision about “on-call” time, Berry v. County of Sonoma (9th Cir. 1994) 30 F.3d 1174.

The decision is a worthwhile read if you are preparing a motion for class certification or just had one denied.

Finally, in the interest of full disclosure (especially important if you consider my views on the opinion to be inaccurate in any way), I authored the Appellant’s briefs in this appeal while employed at another firm.

The Complex Litigator

The Complex Litigator reports on developments in related areas of class action and complex litigation. It is a resource for legal professionals to use as a tool for examining different viewpoints related to changing legal precedent. H. Scott Leviant is the editor-in-chief and primary author of The Complex Litigator.